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Software Speak: On ORCL-N, MSFT-HPQ, RAX-Apollo Deals

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As cloud computing comes of age and companies scramble to capture a larger share of the opportunity, some companies focus on innovation, others expand through acquisitions while most do a little bit of both. Given that backdrop, I thought it would be fun to look at three important deals of recent times. So here goes-

What’s Holding Up Oracle’s Netsuite Buy?

Oracle (ORCL - Free Report) chairman Larry Ellison appears to be the biggest roadblock to the company’s $9.3 billion acquisition of Netsuite , the company which he co-founded with Evan Goldberg around 18 years ago, and in which he and his family entities together hold a 40%+ interest.

This is despite the fact that Netsuite’s independent group of directors (excluding Ellison) determined that the $109 a share Oracle will pay is acceptable, as long as a majority of shareholders other than the Ellison group voted in favor.

The case is interesting because a higher price will fetch Ellison and his relatives a higher profit, while a lower price will be more beneficial to Oracle. This is perhaps the reason that the second largest shareholder T Rowe Price, which is opposing the transaction, has said, "In our view, the inherent conflicts of interest between NetSuite, the Ellison entities and Oracle are daunting and may be impossible to manage."

The objections raised were-

Ø  Netsuite remains valuable as an independently-traded company

Ø  The purchase consideration is inadequate

Ø  A lack of competitive bids for Netsuite

Ø  There is an irreconcilable conflict of interest between the Ellison entities, Oracle and Netsuite

Taking the objections from bottom up, there’s no denying that there is a conflict of interest made more problematic because it is hard to define. Does Ellison personally consider his stake in Netsuite less valuable than his interest in Oracle? Is he then betraying his fiduciary duty to Netsuite shareholders at a significant financial cost to himself? T Rowe Price hasn’t given credence to the independent board’s decision for some reason, which brings us to the next point-  

What could be the reason for the lack of competitive bids for Netsuite? It appears that Netsuite signed a non-solicitation agreement, meaning that it wouldn’t invite offers from other potential buyers while its talks with Oracle were on. At the same time, it could consider unsolicited bids in the discharge of its fiduciary duty to shareholders.

So while it won’t go out of its way to invite offers, there is no restriction on other companies that consider it more valuable from extending an offer. Since no such bids have come in since, the purchase price could be justified.

But share prices have appreciated more than 31% since the announcement in July (compared to the 19% premium suggested in Oracle’s offer price), meaning that investors expect a higher offer either from Oracle or somebody else.  The activist claims that Oracle should value Netsuite the same as WorkDay notwithstanding the fact that the market values it more.

So what does Netsuite do and why is it so important for the two to combine? The company is small with respect to Oracle, but its specialty is that it is 100% cloud-based, i.e. it offers its software as-a-service. What’s more, the company has an integrated solution that takes care of multiple needs of businesses, such as enterprise resource planning (ERP), accounting, customer relationship management (CRM - Free Report) and ecommerce. Companies moving to the cloud are increasingly going for more integrated solutions as a means of getting the most out of their data while also generating greatest return on their investments.

But why would Netsuite sell? First of all, it’s at least partially true that if the price is right, everything is for sale. So if investors get a good deal, why not? Second, unlike Netsuite, Oracle has significant international presence that can help grow the business. The question then is then, can Oracle achieve the same thing by collaborating closely with Netsuite? The answer is probably yes, but only if it shares profit with Netsuite. And this is exactly what T Rowe Price wants to cash in on.

My guess is, Oracle will make a higher offer.

Both Oracle and Netsuite have a Zacks Rank #3 (Hold). Butyou can seethe complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

 

 

Microsoft’s Gain Is Salesforce & Oracle’s Loss

Microsoft (MSFT - Free Report) has scored a huge win over market leader Salesforce (CRM - Free Report) and number three Oracle through a six-year deal with HP (HPQ - Free Report) as a Dynamics CRM customer. HP previously split its CRM needs between these two technology heavy-weights with its sales team using the Salesforce solution and support team the Oracle solution.

When cloud computing was still a new phenomenon, companies used to worry more about single-sourcing. But it’s becoming increasingly apparent that this is a more expensive and complicated process. So HP intends to maximize the cost and efficiency benefits of the cloud, including through big data and analytics. And who better to do it with than Microsoft, with which it already has a close partnership in the client computing segment.

In July, Microsoft combined three large chunks of its cloud offerings into what it’s now calling Dynamics 365. This includes CRM, ERP and its cloud-based Office suite. To further sweeten things, the suite includes Cortana voice assistance, with the newly-acquired LinkedIn possibly joining the CRM side soon.

Unlike its other rivals, Salesforce is not looking to combine CRM with ERP, but this doesn’t appear to be hurting its business any. It is the only one of the leading CRM players that continues to grow despite being a CRM pureplay according to numbers from Gartner. Microsoft and Adobe are also growing, though off a much smaller base and at a slower rate.

Microsoft, Salesforce and HP have a Zacks Rank #3.

 

 

Rackspace Goes Private To Reinvent Itself

Once upon a time, Rackspace was a cloud infrastructure provider, literally renting out its server rackspace to companies looking to save on those costs. It even tasted strong growth the first few years after going public in 2008.

Then along came Amazon (AMZN - Free Report) with its AWS offering and aggressive pricing policies, followed by Microsoft and Google. These hyperscale vendors with their deep pockets started playing by Amazon’s rulebook since it was the market leader although Microsoft compromised less, given its cloud at enterprise customers. The worst of the pricing war was in 2013-2014, but Rackspace’s smaller scale and more limited resources more or less shoved it out of the market.

Since the company could no longer operate as it has traditionally, Rackspace decided to re-invent itself by piggybacking on the very same companies that drove it out of the business. Without the resources but with the ability to operate in the cloud infrastructure segment, the company got into deals with Amazon and Microsoft to resell their services.

The reseller model appears to be going well but is not really big enough yet to offset the declines in its traditional business. The company would also be looking to build its stature as a cloud and managed services provider. So management likely thinks that it would be a good idea to keep its current hardships out of the public eye, thereby protecting its brand value. Just as Dell did a few years back. So as has been rumored earlier, Rackspace announced its sale to a private equity firm called Apollo Global for $32 a share or $4.3 billion.

Chairman and co-founder Graham Weston said on the occasion that “This transaction will provide Rackspace with more flexibility to manage the business for long-term growth and enhance our product offerings”.

Rackspace, Amazon and Google’s parent Alphabet (GOOGL - Free Report) all have a Zacks Rank #3.

 

 

In Conclusion

Cloud computing involves a paradigm shift to a completely new way of doing things with both companies and providers in the process of figuring out what is most profitable for them. Larger players continue to attempt bundled offerings in the hopes of locking in customers. At the same, it’s clear that there remains ample scope for smaller players provided they find their niche.

 

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